Internal Revenue Service
Revenue Ruling

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 Rev. Rul. 79-1

1979-1 C.B. 60

Section 61

IRS Headnote

Reduced salary; re-employed civil service annuitant. The salary received by a reemployed civil service annuitant after an amount equal to the annuity allocable to the actual employment period was deducted as prescribed by law is includible in gross income and is wages for purposes of income tax withholding.

Full Text

Rev. Rul. 79-1

ISSUE

When a reemployed federal annuitant incurs a salary reduction equal to the amount of the annuity received, what amount of the salary is includible in gross income and is wages for purposes of income tax withholding?

FACTS

A retired federal employee who was receiving an annuity from the Civil Service Retirement and Disability Fund was appointed to a civil service position. The employee continued to receive the annuity after reemployment and, pursuant to 5 U.S.C. section 8344(a) (1976), an amount equal to the annuity allocable to the period of actual employment was deducted from the employee's pay and deposited in the Treasury of the United States to the credit of the fund.

LAW AND ANALYSIS

Section 61(a) of the Internal Revenue Code of 1954, provides that, except as otherwise provided by law, gross income includes all income from whatever source derived, including compensation for services.

Section 3401(a) of the Code, relating to income tax withholding, provides that wages means all remuneration for services performed by an employee for an employer unless otherwise excepted by law.

The compensation for services received by the reemployed annuitant is "adjusted salary," that is salary less the deduction prescribed by law. Under federal law, the annuitant is not entitled to receive the full amount of the salary for the civil service position. Therefore, the annuitant receives no economic benefit from the amount of the reduction.

HOLDING

The re-employed federal annuitant must include in gross income the reduced salary received. This reduced salary is wages subject to income tax withholding. The taxability of the annuity payments is determined under section 72 of the Code.